Who counts as a disqualified person
| Person or Entity | Disqualified? |
|---|---|
| You, the account holder or trustee | Yes |
| Spouse | Yes |
| Parents and grandparents | Yes |
| Children and grandchildren | Yes |
| Spouses of your descendants | Yes |
| Entities 50% or more owned by a disqualified person | Yes |
| Service providers to the plan (CPA, advisor, custodian) | Yes |
| Siblings, aunts, uncles, cousins | No |
The IRS provides a comprehensive list of disqualified persons. Your plan cannot buy from, sell to, lend to, or provide services for any of the following:
- The fiduciary: This includes you, the account holder or 401(k) trustee, and any person with discretionary authority or control over the plan's assets.
- Lineal family members: Your spouse, ancestors (parents, grandparents), lineal descendants (children, grandchildren), and the spouses of those descendants. The estate of a lineal family member is also disqualified.
- Controlled entities: Any corporation, partnership, or trust where 50% or more of the equity or beneficial interest is owned, whether directly or indirectly, by a disqualified person.
- Service providers: Individuals or firms providing services to the plan, such as investment advisors, CPAs, or custodians.
- Officers and directors: High-level employees or 10% shareholders of entities controlled by disqualified persons.
Who is not disqualified
Under current tax law, siblings (brothers and sisters), aunts, uncles, and cousins are not disqualified persons.
Your plan can transact with these relatives. However, you must ensure the transaction doesn't create an indirect benefit to a disqualified lineal family member. Even allowable family transactions must satisfy the exclusive benefit rule.
The Thanksgiving Rule: Before transacting with non-disqualified family members, consider this: if the deal goes poorly, will it harm family relationships? Sometimes the legal answer is "yes" while the practical answer should be "no."
Indirect benefits and intermediaries
The IRS prohibits not only direct transactions but also indirect benefits. You cannot use your retirement plan to create a favorable outcome for a disqualified person through an intermediary.
- Employment triggers: Your IRA cannot invest in a private company on the condition that the company hires your son or daughter. This is an indirect use of plan assets for the benefit of a disqualified person.
- The "straw man" scenario: You cannot sell property from your IRA to a third party with a pre-arranged agreement that the third party will then sell it to your spouse. The IRS views this as a single, prohibited transaction between the plan and a disqualified person.
The exclusive benefit overlay
Even when a relative isn't on the disqualified list, every transaction must still pass the exclusive benefit test. This means your plan must be treated as a purely commercial entity: market rates, standard terms, full enforcement.
Example: renting to a cousin. You can legally rent an IRA-owned property to a cousin, but you must treat them as a third-party tenant: market-rate lease, standard terms, eviction for non-payment if necessary. If you provide a "family discount" or fail to enforce the lease, you're prioritizing a personal relationship over the exclusive benefit of the plan. That can lead to disqualification.
The "reverse benefit" prohibition
A common misconception is that providing free labor or resources to your plan is helpful. In reality, any provision of goods, services, or facilities between a plan and a disqualified person, in either direction, is prohibited.
- Sweat equity: You cannot perform physical repairs or maintenance on property owned by your IRA. Whether you're paid or do it for free, your labor is a "service" provided to the plan: a prohibited transaction.
- Licensed real estate services: Your plan can legally purchase or sell real estate, but if you're a licensed realtor, you cannot act as the agent for the transaction. Listing the property, negotiating the contract, or managing the closing are all professional services provided to the plan. This is prohibited even if you waive your commission.
- Personal use of plan assets: You cannot store your personal property (vehicles, tools, furniture) in a garage or storage space owned by your retirement plan. This is considered "furnishing of facilities" by the plan to a disqualified person, regardless of whether you pay rent.
Maintaining compliance
The key to staying compliant is simple: maintain arms-length distance between your plan and all disqualified persons. No direct transactions, no indirect benefits, no provision of services in either direction. By respecting these boundaries, you protect the tax-sheltered status of your retirement wealth.
Frequently Asked Questions
Are siblings, aunts, uncles, or cousins disqualified persons?
No. IRC Section 4975 doesn't include siblings, aunts, uncles, or cousins in the disqualified persons list. Transactions with them are permitted, but every transaction still has to satisfy the exclusive benefit rule: market terms, real enforcement, no favors.
Can I rent IRA-owned property to a family member who isn't disqualified?
Yes, as long as you treat them exactly like any other tenant: market-rate rent, standard lease terms, and normal enforcement if they don't pay. A discounted rate or unenforced lease terms turn a legal transaction into a violation of the exclusive benefit rule.
What counts as an indirect benefit to a disqualified person?
Any arrangement where a disqualified person benefits from your plan's transaction, even without a direct exchange. Conditioning an investment on a family member's employment, or routing a sale through a third party who then resells to a disqualified person, are both treated as a single prohibited transaction.
What happens if my plan transacts with a disqualified person?
The consequences are severe and differ by plan type. See Prohibited transactions for the full breakdown of IRA disqualification versus Solo 401(k) excise taxes.